Merchant Power Plant Plans Go Flat
Dec 7, 2004 - Baton Rouge Advocate - Author(s): Ted Griggs
Three years ago, state officials embraced merchant power plants as an economic catalyst.
The plants, which sell power to the highest bidder, would mean billions in investment, hundreds of construction jobs, cheaper electricity for Louisiana's residents and new customers for the state's natural gas producers. Independent power producers announced plans for around 30 plants in Louisiana, where abundant and cheap natural gas would generate greater profits as electricity prices soared.
The state rolled out the red carpet, offering the power plants tax breaks ordinarily reserved for manufacturers. More than half of the announced plants were built, but today a number of the facilities are struggling financially, said David E. Dismukes, associate director of the LSU Center for Energy Studies.
One facility has been partially completed, while others haven't been built and may not be.
"The assumptions for the plants were based on cheap natural gas, $2 to $2.25 per (thousand cubic feet)," Dismukes said.
"Well, guess what? We're not there anymore, and we're not going back."
Natural gas prices have more than doubled since 2001.
Meanwhile, the spot markets, where merchant plants expected to sell their power, never materialized in the Southeast, said Jack Hawks, a spokesman for the Electric Power Supply Association.
"There was a lot of opposition from the utilities and state regulators," Hawks said. "California and Enron just exacerbated that problem."
In addition, utilities failed to retire a number of old, inefficient power plants, which also reduced the demand for new, more -efficient plants' electricity, Hawks said.
Instead, utilities improved the old plants' efficiency, especially coal-fired and nuclear facilities, and kept operating them. This helped lead to excess capacity, Hawks said.
Existing plants in the Southeast could generate nearly 46 percent more electricity this summer than the region needed.
As a result, a number of the new plants nationwide have been shut in or are operating at reduced capacity, Hawks said.
Hawks said he did not know the number of new plants by state or nationwide that have been closed or operate well below capacity.
A 2004 report by LSU's Center for Energy Studies showed about 45 percent of the additional electricity capacity proposed in Louisiana may not be built.
Only one of the nine plants scheduled to go online in 2004 or later is operating. Five have been canceled or tabled. Dismukes said many of the proposed plants won't be built unless companies can sign long-term contracts to sell their power.
Meanwhile, independent power producers face another challenge: utilities constructing their own new plants, with the costs built into the rate structure. Hawks said merchant plants are beginning to recover financially and by the end of the decade, more new plants will be built and go online.
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